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Demystifying Facilities & Administrative Costs (aka “overhead” or “indirect costs”)

It is no surprise that OSP fields a large number of questions about Facilities & Administrative (F&A) costs (aka “overhead” or “indirect costs”) on externally funded grants and contracts. These costs can represent a large portion of a project budget and the methodology for calculating them can seem like a mathematical equation gone awry.  As such, OSP developed a list of Frequently Asked Questions (FAQs) to help demystify the concept of F&A and how we manage these costs.

In addition to the FAQ’s below, further information on F&A can be found in the F&A Cost and Recovery Policy.  This policy is posted on the OSP website at http://www.niu.edu/osp/policies/NIU.shtml.

Where do the F&A rates come from?

The university negotiates our F&A rates with the Division of Cost Accounting (DCA) of the U.S. Department of Health and Human Services (DHHS).  DHHS is considered to be our “cognizant” agency which essentially means that NIU receives a significant portion of our external funding from this agency so the federal government directs us to negotiate our F&A rates with DHHS. We negotiate the rates based on the following functions or activities: 1) research; 2) instruction; and 3) other sponsored activities including public service.

What are NIU’s current F&A rates?  

NIU’s current rates are:

  • Research – 47%
  • Instruction – 47%
  • Other sponsored activities and public service – 34%
  • All off-campus projects – 26%

The federal government caps the amount of administrative costs that universities can recover at 26% so in essence, when we negotiate our F&A rate with DHHS, we are really only negotiating the “facilities” portion. NIU’s rate agreement with DHHS can be found on the OSP website at: http://www.niu.edu/osp/resources/info.shtml.

Why does NIU choose to negotiate a F&A rate?  

Negotiating and applying an F&A rate to an externally sponsored project is actually not a choice, it is requirement for receiving federal funding and sponsors expect to see F&A in proposal budgets.

A common misperception also exists that F&A is an OSP “fee.” F&A is not an OSP fee. It is true that the OSP is funded by F&A recovery however; OSP’s portion of the total university’s annual F&A recovery is minimal. Detailed information on how the Division of Research and Graduate Studies (DRGS) expends our share of the recovered F&A can be found on the OSP website at Overview of Facilities & Administrative Costs at NIU.

What does the Facilities& Administrative rate include? 

The facilities component includes costs such as laboratories, building operating and maintenance costs, depreciation, interest and debt service, utilities (e.g. electricity and water), research instrumentation and materials while the administrative component includes general administration, sponsored projects administration, compliance (e.g. Institutional Review Board or “IRB”) and student services.

It’s also important to understand that F&A funds are used to support university programs such as travel support for faculty and students, seed funding for early stage projects, cost share commitments on proposals, and many other activities that strengthen the university’s capacity to perform sponsored research and support faculty scholarship.

How do we recover F&A from the sponsor?

Most of our awards are paid on a cost-reimbursement basis. This means the university (i.e. principal investigator) must incur the project costs before the sponsor will reimburse us for project expenses, including F&A. As such, most of the university’s F&A costs are only recovered as we incur project expenses.  When investigators do not fully spend out an award, the university does not recover F&A on the unspent funds. (When this situation occurs, we forego F&A that would have been due to the university, we refer to this as “foregone F&A”).

Who gets the recovered F&A costs?  

Recovered F&A is distributed to many campus units that support external funding activities. Detailed information on how F&A is distributed across campus can be found on the OSP website at Overview of Facilities & Administrative Costs at NIU

Does the University really recover up to 47% on all sponsored awards?  

No. In fact, there are two common misunderstandings about F&A recovery.

First, a project budget that carries the full 47% rate does not mean that 47% of the total project expenditures are for F&A.  This is because there are certain budget line items for which we cannot apply F&A costs. These line items include: 1) equipment; 2) capital expenditures; 3) patient care; 4) tuition remission; 5) rental costs of off-site facilities; 6) scholarships and fellowships; and 7) the portion of each subaward/subcontract in excess of $25,000. Excluding these line items from the direct project costs gives us what is called our modified total direct cost (MTDC) base for which we apply the 47% F&A rate. Once these exclusions are taken into consideration, the effective F&A return on a project with a “full F&A rate” may be as low as 25%.

Second, over the last three years our effective F&A rate was 11%. It is not unusual for universities to have an effective rate that is lower than their negotiated rates. The MTDC calculation method described above is one factor contributing to this situation. Other factors include: 1) a university’s sponsored funding portfolio in that some sponsors and/or programs, such as non-profit funders and institutional training programs, prohibit or limit the amount of F&A that can be recovered; 2) the recent increase in federal agencies restricting reimbursement of F&A and; 3) the university’s decision to waive these costs for specific projects where the benefit to the investigator and institution outweighs the loss in F&A.

Why do universities have different F&A rates?

Each university must negotiate their F&A rates with their federal cognizant agency. The idea behind this is that institutional costs differ depending on a number of factors including research to teaching ratio, geographic location, institution type, etc. The methodology for developing a rate varies significantly from one school to the next so it is difficult to make direct comparisons between another school’s rates and NIU’s.

How does NIU’s rates compare with other universities’ rates?

NIU’s rate is on par with other universities and our highest rate, 47% for research and instructional activities is actually less than the national average. According to the Council on Governmental Relations (COGR) and Office of Science & Technology Policy (OSTP), the average F&A rate for universities is 50%.

Can I submit a proposal to a sponsor who does not fund F&A costs?

Yes.  OSP will comply with sponsor guidelines that explicitly limit or prohibit the inclusion of F&A on a proposal.  Most non-profit sponsors tend to pay a lower rate or prohibit F&A reimbursement altogether. See the F&A Cost and Recovery Policy for more information.

Can we waive F&A on an industry sponsored project? 

Rarely will we entertain an F&A waiver for an industry funded project. This is because NIU, as a public institution must conduct research on a full cost recovery basis. When we do not recover F&A from private sponsors, the university is essentially subsidizing projects conducted for the primary benefit of the company.